How FG can uplift the Capital Market (1)

In the last 10 years or so, Nigeria has made remarkable progress in capital market development. The menu of available asset classes has been expanded to include Exchange Traded Funds, and the market infrastructure has been modernised and strengthened with the Platforms for Over-the-Counter trading namely the NASD and FMDQ now established. Improved regulation and confidence-building measures by the regulators have contributed in no small measure to lift the market. Specifically, the Securities and Exchange Commission has undertaken a number of initiatives to boost investors’ confidence notable among which are the establishment of the National Investors’ Protection Fund meant to cushion the adverse effect of losses suffered in the capital market, the e-dividend policy designed to minimise cases of unclaimed dividend, the Direct Cash Settlement scheme which ensures that investors receive their money directly whenever securities are sold, the corporate governance scorecard for companies listed on the Nigerian Stock Exchange and the recapitalisation of capital market operators which has gone a long way in curbing sharp practices in the market.

As a complement, the NSE implemented minimum operating standards for market operators as well as launched the Premium Board which offers issuers the benefits of greater visibility and opportunities to raise capital. Undoubtedly, these measures have sent the right signals to the investing public with regard to rules enforcement and market discipline.

While these are encouraging developments, the country’s capital market continues to trail behind those of peer countries. The flagship securities exchange, the Nigerian Stock Exchange, is small compared to the major international exchanges, with a total market capitalisation of circa $80bn (about N23tn, according to data from the NSE) with just 166 listed companies, compared to the Johannesburg Stock Exchange, for example, with equities capitalisation alone a little shy of $1tn representing over 280 per cent of South Africa’s GDP and over 380 listed companies let alone the New York Stock Exchange whose market capitalisation is about $21tn with more than 2,000 listed companies.

At less than 20 per cent of the country’s GDP, the current size of the capital market constrains its role in national economic development. Market liquidity as measured by trading volume and turnover is comparatively low. The issuer base is not diversified. More specifically, industry composition in the stock market is concentrated in a few sectors namely consumer goods (especially Nestle and Nigerian Breweries) and industrial goods (driven by Dangote Cement). The major equity index (NSEASI) has significant weights in banking stocks which are sensitive to business cycles. In contrast, agriculture and technology sectors, critical for economic diversification, take up a much smaller proportion. Most of the systemically important corporations such as the International Oil and Telecoms companies are not listed on the stock exchange. Foreign investors are significant players in the equities market often dictating the pace of market activity. This leaves the market vulnerable to external shocks.

Local institutional investors such as pension funds and mutual funds are less active in the equities market with asset allocation concentrated in government bonds and Treasury bills generally considered safe and liquid. The private bond market is very small compared to that for the government. According to the “NSE Q1 2018 fact sheet”, outstanding FGN bonds as of March 30, 2018 stood at circa $29.5bn (about N9tn), state and municipal bonds about $1,85bn (or N565bn) while corporate bonds amounted to only about $900m (or N9bn). Thus, the private fixed income market is not a significant long-term financing source for companies due in part to the crowding out effect from government borrowings

There is a consensus among capital market players that integrating the Nigerian capital market master plan into the country’s Economic Recovery and Growth Plan will position the market for sustainable growth. It is disheartening to note that the government’s ERGP seems not to recognise the place of the capital market in capital formation and economic growth. How else does one interpret the fact that throughout the 140-page ERGP document, no mention was made of government’s plan for the capital market. In contrast, in Malaysia and other emerging economies, sections of even annual budgets are devoted to addressing government incentives for the capital market. Take the 2018 Malaysia budget for example, it has a section on “Tax incentives for Malaysia’s capital market” in which “the budget proposes a three-year exemption on stamp duty for exchange-traded funds in order to promote Malaysia’s capital market and make it internationally more competitive”. In addition, “the budget offers tax relief for venture capital companies and income tax deductions for environmentally and socially responsible Islamic bond issuers”. This is a country that is currently implementing a second capital market development blueprint after successfully implementing the first 10-year capital market development plan.

Back home, President Muhammadu Buhari’s Democracy Day speech, more like a state of the nation address, which had 37 paragraphs would have made a great deal of difference to the investing public if it had devoted at least one paragraph to developments in the capital market in the last three years with emphasis on government’s plans to help uplift the market. By not accommodating the capital market, Buhari missed an opportunity to celebrate the modest gains recorded by the market in the last three years given that equities capitalisation between May 29, 2015 and May 29, 2018 had actually increased from about N11tn to about N14tn. This oversight seems to be the consequence of not having a capital market advocate in the government’s economic team. To address this, the Director General of SEC and the CEO of the NSE can be made members of the economic team to provide useful information as well as proffer suggestions on how to mainstream capital market development in national economic plans. Some other countries have even gone a step further than just having a strong capital market representation in the government’s economic team. In Egypt for example, the Chairman of the Capital Market Authority serves on the Board of the Central Bank of Egypt. The reason is obvious: listed banks, supervised by the central bank, also come under the regulation of capital market authorities. In amending the CBN Act of 2007, consideration can be given to including the SEC DG as a member of the CBN Board as is the practice in other jurisdictions.

To be concluded

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